USDA Home Loans: The Complete Guide

The USDA Home Loan is a specialized mortgage financing option meant to assist rural and suburban homebuyers achieve the dream of homeownership.

The USDA Loan Program

The USDA Loan Program is also known as the Single Family Housing Guaranteed Loan Program. USDA Guaranteed Loan Program offers loans for home purchase, new construction and refinances. The USDA Rural Development (RD) is committed to improving the economy and quality of life in rural America.

What are the loan program highlights? USDA Guaranteed Loan is 100% financing, with no down payment, and is a 30 or 15 year loan term with fixed interest rates that serves low to moderate income applicants. There are many other benefits available for eligible applicants.

What governs this program? Single Family Housing Guaranteed Loan Program Technical Handbook or the HB-1-3555, also known as the 7 CFR, Part 3555. This regulation is the rule book for program delivery and all loan decisions must be supported by the regulation.

Even though USDA is not an underwriter they do require lenders to run all loans through GUS, Guaranteed Underwriting System, which provides automated underwriting (AUS) for all loans prior to approval.

Underwriters that receive an accept through GUS have an approval for that step and means the loan is insurable by USDA. However, the loan will still need to be sent to USDA/RD to be insured prior to receiving a clear to close.

USDA Loan Guarantee?USDA Loan Guarantee Fee?USDA Loan Annual Fee?

The USDA Loan Guarantee means that USDA has insured a mortgage. When the homebuyer fails to make mortgage payments and goes into default on their mortgage then USDA sells the property to cover the unpaid debt to the lender/ servicer.

In 2017 USDA Rural Development Guaranteed Loan Program got even better! USDA reduced their upfront funding fee from 2.75% down to 1%, and lowered the annual fee, “mortgage insurance”, from .50% down to .35%, saving homebuyers thousands of dollars. The fees are charged upfront and annually.

So what is a USDA Guarantee Fee? This is a government fee that is collected at closing by the lenders that is paid directly to USDA in order to use the program. The fees help fund the USDA Government programs, so they can continue to offer the zero down home loans to Americans across the United States.

USDA Loans require a USDA Loan Guarantee Fee, or upfront guarantee fee of 1% which is paid by the homebuyer and is financed into the base loan amount. USDA total loan amount calculation is 100% financing plus the 1% upfront Guarantee Fee. The upfront Guarantee Fee may be financed into the loan amount, partially financed or paid in full at closing so it’s not being financed.

What is the difference between the upfront Guarantee Fee and the USDA Loan Annual Fee? The Guarantee Fee of 1% of purchase price is paid upfront/ at closing and is financed into the base loan amount. The Annual Fee, or previously known as the mortgage insurance premium, is an annual fee of .35 percent that is included in monthly mortgage payment and applies to both purchases and refinances. The Annual Fee, mortgage insurance is required for the life of the loan unless the loan is refinanced into a different loan type, like a conventional loan.

The annual fee is paid monthly by homeowner and is seen in total monthly mortgage payment. Monthly payments are held in escrow until annual fee comes due. Annual fee bills are paid by the lender/servicer to USDA.

How does a USDA Loan Work?

USDA Loans are similar to most other loans when it comes to the process. The main difference is the last step, once the loan is approved then it is shipped out to USDA/RD to be insured.

It is important to know what your budget is before you begin shopping for a home. In addition to this, there are income limits that may determine if you are eligible for a loan or not. Also, sellers may instruct agents to show their home to Pre-Approved buyers only. Being ahead of the game will make it much easier. When utilizing the USDA home loan program be prepared, closing may take 30 -45 days depending on USDA turn times.

Who may apply for this Program?

Applicants must be a US citizen, US non-citizen national, or a qualified alien. Non-citizens must pass systematic alien verification for entitlement by providing documentation requested.

Home buyer must occupy the property as their primary residence and cannot have another guaranteed or direct home loan at the time of closing. Rural development program will not guarantee loans for investment properties or short-term housing.

Applicant’s gross household income is within the income limit for the County.

Applicants must live in a government approved state where the USDA loan program is in place and have in income that is within the limit governed by the location you live and the property itself (Visit our maps pages for details on these): -

Home buyer is unable to purchase a home without the USDA Guaranteed Loan and can’t obtain a traditional conventional mortgage because lack of assets or money for a down payment.

USDA home loan applicant must have a clear “CAIVRS” and not be suspended or debarred from participating in Federal Programs. SAM, System for Award Management, is operated by US General Services Administration, GSA, and is used to verify if applicant is suspended or debarred from Government Programs.

Do I Qualify for a USDA Loan?

Are you a US citizen, non-citizen national or alien resident with papers?

Do you have 2 years history of employment?

Do you have stable income that is documented?

Are you under the household income for your county?

Will you occupy the property as your primary residence?

Do you have a credit score of 620 or greater?

If you answered yes to all of these questions, then you my friend may qualify for a USDA Home Loan.

What if I don’t Qualify for a USDA Mortgage?

Don’t worry your dream of homeownership is not over. Most of the USDA approved leaders offer other loan options. Remember, if you are a veteran or your spouse is a veteran you could qualify for a zero money down VA loan. While the FHA loan allows you to receive a gift for the 3.5% down payment that is required, or you can apply for down payment assistance which is offered by most States.

Other USDA Home Loan Considerations

To be eligible for USDA financing, homebuyers must meet the qualifying debt-to-income ratio of 29/41. What this means is that no more than 29 percent of your monthly income should be used on housing costs and no more than 41 percent of your monthly income should be used on combined debts, including housing. However, ratios can be extended up to 34/43 with certain compensating factors.

Guaranteed USDA Home Loans currently are only available with a 30-year fixed rate term.

Those without sterling credit can still be eligible. Non-traditional credit histories may be accepted.

The guarantee fee can be rolled into the entire loan amount.

A USDA home loan is not just for first-time homebuyers. There are no restrictions regarding previous ownership.

USDA loan is not limited to low-income borrowers. Moderate-income borrowers may also qualify. Income limits vary by area.

The USDA Loan Process

This list should give you a good idea of what to expect when going through the loan process:

Get Pre-Qualified

USDA Specialist will complete an application with you, pull credit, and review debts and income. Note: A pre-qualification does NOT require documents to be verified. (Takes about 30 min - see our USDA Loan Requirements page.)

Receive your Pre-Approval

USDA specialist will review your income documents (paystubs, bank statements, w2s, and tax returns), order a verification of employment for work history and verify income, and put together your housing budget. It also helps your real estate agent find the right property that fits your pre-approved criteria. (Takes about 48hrs, may be longer depending on scenario.)

Keep in mind, the time in between being Pre-Approved and searching for a property you must do everything in your power to keep your debts exactly where they were when you got approved, or pay them down. Credit scores need to remain the same or increase it. Do NOT open any new debt; like buying a car, opening a credit card, closing a credit card. These will all affect your Pre-Approval and you may no longer be approved.

Search Eligible Properties

Borrowers, real estate agent and loan officer work together to determine eligibility and eligible properties using our Property Eligibility Map. (On average 2 wks, to 2 months, or longer.)

Make an Offer

Your real estate agent will present your offer to the seller’s agent. When making your offer, go in with a strong offer and request for sellers to pay your closing costs. Reach out to your loan officer/ USDA specialist if you have any questions about your proposed mortgage payment. They can crunch the numbers and let you know what your mortgage payment will be based off of what the purchase price is of the home. (Takes a couple days of negotiating back and forth with sellers.)

Sign Contract

Sellers accept your offer, and everyone signs the purchase agreement.

Processing Loan

Loan officer/ USDA specialist will collect any remaining documents needed to send your loan to processing. Once sent to processing then the processor will review documents and request any additional documents needed to move the loan into underwriting. The processor will also order, home owners insurance, title, transcripts, and appraisal. They will verify income, assets, and employment. (Typically takes 3-5 days.)

Order Inspections

You can order a home inspection right away and then your lender will order a appraisal. USDA appraisals follow the same guidelines as an FHA appraisal. The appraiser will make sure that the property meets HUD standards and any repairs must be completed before closing. The difference between an inspection and an appraisal is that a home inspection is not required by USDA and an appraisal is. The home inspection is for your peace of mind, since this is a large investment/ purchase you want to make sure that the home is in good condition, and a lot of times the homeowners insurance company may require a 4-point inspection. In comparison, an appraisal is an inspection that tells the lender and USDA what is the value of the home, or “market value” of the property. If an appraisal comes in higher then loan amount can be increased to absorb some of the closing costs.

Underwriting Loan

Processor will then send the loan to underwriting. The underwriter will review the file in great detail. They will determine if borrower’s credit and capacity to repay the loan are sufficient. They also will verify that the loan meets RD guidelines, Rural Development also known as USDA. They will review the appraisal report and confirm that property meets HUD guidelines, is in good condition and qualifies for a USDA loan. (Usually takes 1 to 2 weeks.)

Once file is reviewed then the underwriter will give a conditional approval and request additional documentation to send the loan to RD/USDA.

Clear Conditions

The loan officer and processor will work with you to clear all conditions requested from the underwriter. Conditions are the last few items needed for the underwriter to send the loan to USDA. With a conditional approval the loan officer can lock the interest rate and give an estimate as to how long it will take to close depending on USDA turn times. (Usually takes about a 1 week.)

Loan is sent to USDA/RD

Once the underwriter receives sufficient documentation the loan is then sent to USDA to be insured. RD turn times vary, depending on the time of year and how busy they are at the time of submission. Each State and County has their own turn times. The loan officer or underwriter can check turn times at that time of submission and inform buyers and sellers as to when the closing can occur. (Estimate is 24 hours to 10 business days.)

Clear to Close

The underwriter will approve the loan and clear it to close. This means that the file can be prepped for closing and closing can be scheduled 3 days from the time closing disclosures are signed. (Takes 3 days TRID rule.)

Closing

The closing typically occurs at the title company’s office. This is where you, the buyer, the sellers, and notary sign all documents related to mortgage. Feel free to ask questions at this time as you review and sign documents. When all the documents are signed then the title company will record the Deed with the County. At this point the loan will close, fund and you will receive the keys to your new home.

Getting started is easy - and can be done in less than 2 minutes. Fill out our Quick Start form to get started today! After completing the form, a USDA Home Loan expert will contact you and help you determine if you are eligible for the program and get you on your way to becoming a homeowner!

USDALoan.com is owned and operated by Trinity Mortgage, LLC NMLS ID #1787715. USDALoan.com and Trinity Mortgage, LLC are not endorsed or affiliated with the United States Department of Agriculture.Please note that this service is not available in Arizona, New York or Virginia or to borrowers in those states.Customers with questions regarding licensing may visit the Nationwide Mortgage Licensing System(www.nmlsconsumeraccess.org).